Have you not reason then to bee ashamed, and to forbeare this filthie noveltie, so basely grounded, so foolishly received and so grossely mistaken in the right use thereof? In your abuse thereof sinning against God, harming your selves both in persons and goods, and raking also thereby the markes and notes of vanitie upon you: by the custome thereof making your selves to be wondered at by all forraine civil Nations, and by all strangers that come among you, to be scorned and contemned. A custome lothsome to the eye, hatefull to the Nose, harmefull to the braine, dangerous to the Lungs, and in the blacke stinking fume thereof, neerest resembling the horrible Stigian smoke of the pit that is bottomelesse.

For those of you looking for something more current, here's some smoking statistics from the BBC.

The iPhone is out today! Here's the unofficial ad (video). Apparently, the odds that someone is trampled while trying to get one stand at 20/1, while you can also bet that it will spontaneously combust at 150/1 (bargain!). Microsoft's Steve Ballmer's reaction is well worth watching (video). And before you rush to the shops to buy one, read this Wired article on how the iphone introduces kids to black magic.

DO NOT disturb your neighbours. Best animation I've seen online in a while

The Taxes in Europe database is the European Commission's on-line information tool covering the main taxes in force in the EU Member States. Access is free for all users. The system contains information on around 500 taxes, as provided to the European Commission by the national authorities. The information can be found quickly and easily using the search tool.

The Taxes in Europe database contains, for each individual tax, information on its legal basis, assessment base, main exemptions, applicable rate(s), economic and statistical classification, as well as the revenue generated by it. The information is listed in the form of a downloadable file.

More information here. I only had a quick look, but so far I am impressed. The database is comprehensive, information is displayed clearly and the search function works well too.

1. Economic growth, with special reference to the advent of capital and the gains from trade. Simply put, economic growth means that you have something to lose when going to war, not merely a miserable existence.

For most of human history, the production function of any economy comprised of two factors: land and unskilled labour. With the amount of land fixed, unskilled labour is subject to diminishing returns; before long, the marginal worker is more productive yielding a sword than ploughing the land.

Enter physical capital. Your production function starts looking more interesting, and the amount of labour in peaceful production is now larger. In addition, assuming you do go to war, there is a limited amount of destruction you can wreak on agricultural land: burn the crops, and next year no-one will be able to tell the difference. Bomb a factory, and the chances of it miraculously re-emerging are not that good.

And if you think owning physical capital does wonders for your peaceful instincts, try human capital too - that is, skilled labour. The amount of workers that can now be productively employed in peaceful activities simply goes through the roof. Furthermore, if you found rebuilding that factory tricky, try growing doctors and lawyers or making portfolio managers out of slaves.

The threat of losing the gains from trade also provides an effective, if somewhat short-term, deterrent: if we attack China, where are we going to get our cheap victory T-shirts from?

2. Big guns. It's all nice and good declaring war and invading the land of a weaker enemy, but try messing with one that can cause real damage. The A-bomb, especially, not only raises the stakes (anyone for the billion-dollar poker table?) but also completely levels the field: get yourself an A-bomb (not so rare these days), and you have maxed-out on destructive potential.

3. Democracy. Not nearly as important as #1 and #2, but to the extent the masses stand to gain less, and lose more, from war than the elite, democracy is also a force for peace.

4. Better entertainment. It's difficult to beat real-time first-person battle action, raping and pillaging. Nonetheless, reading (since Gutenberg), TV (the past 60 years or so) and the rat-race are good alternatives, while the probability of surviving them is appreciably higher - a bonus when life is not such a pain living.

Tyler's new book is out on 2 August, and I strongly recommend you get a copy - whether you are an economist or not. I will say more in due time, but for now you can pre-order it at Amazon (US), Amazon (UK), Barnes & Noble and Booksense.

And if you would like to see evidence you will love this book, try the most popular economics blog on the net: www.marginalrevolution.com.

England’s smokers are about to be banned from lighting up in pubs, restaurants and offices. [...] The smoking ban is justified using fancy-sounding economic arguments about the ”externalities” of smoking. [...] An ”externality” seems a simple enough concept: it’s a harm suffered or benefit enjoyed by some third party that isn’t reflected in a market transaction. Pollution is the classic example.

Yet the only credible arguments for restricting smoking have nothing to do with economics. The damage caused by second-hand smoke in pubs is not an externality. Neither is the cost to the National Health Service of treating smokers. An ”externality” is not just any old cost or benefit; it has to lie outside a market transaction.

In the case of pubs and restaurants, the market could hardly be more obvious. The landlord wants to attract customers, both smokers and non-smokers, and he’ll do that by giving them the ambience they want. [...] The smoking ban is usually phrased as a ban on smoking in ”enclosed public spaces”. Of course, a restaurant or pub is not a public space: it’s a private space in which the public gather. (If you think a restaurant is a public space, try bringing a picnic along to one.)

Those who argue that smoking should be restricted because of the costs to the National Health Service are on even thinner ice. If I offered to pay for your private medical insurance out of the goodness of my heart, you would be unimpressed, and rightly so, if I then turned round and claimed that your smoking was now costing me money and so I had the right to hide your cigarettes. Similarly, the UK’s decision to fund healthcare from tax revenues does not thereby give the government the right to restrict our freedom to take personal risks. [...] Economic arguments can be double-edged; sometimes they are best not wielded.

Tim has a point when he is saying that 'an ”externality” is not just any old cost or benefit; it has to lie outside a market transaction'. What he misses, however, is the all important concept of property rights and who holds them. Pollution is an externality if the atmosphere is owned by the public; if for some reason the air belongs to the polluting businessman, an externality there is not.

Like Tim, I believe that the smoking ban is a bad policy that rests on dubious economic morality. In fact, I am a smoker with no intention to quit anytime soon, so the ban also harms me directly. Where I disagree with Tim is that, unfortunately, any argument against the smoking ban has to be based on normative (what should be), not positive economics (what is).

The property rights to a pub's air should belong to the landlord, and the property rights to my health should belong to me. In a democratic state with a flexible constitution such as England, however, this is not the case. Property rights are defined by the government as the government sees fit. With the state reserving (or re-claiming) the right to a pub's air or to a citizen's health, the analysis of the smoking ban as correcting an externality stands perfectly well.

That's a shame: the air of my pub should belong to me, and my own body even more so. But don't blame the government for bad economics; blame the morality behind the allocation mechanism of property rights.

If you encountered any problems accessing bluematter at your workplace today, it probably had something to do with Saturday's post: 'F***: The economics of coarse language'. Taking this paper as my starting point, I was discussing how coarse language serves a very useful signalling purpose and how, contrary to the author's assertion, word taboo-isation can be perfectly rational.

I have now taken the offending post offline, but if you are interested email me and I will be happy to forward it to you. Also, I would be grateful if anyone who encountered problems and can now access the blog could drop me a line and let me know (I am not sure whether I've been blacklisted temporarily or whether this will have a more lasting effect).

While on the subject of censorship, I also have a nagging suspicion that bluematter is no longer accessible from China: I used to get hits on a daily basis, but in the past 20 days there hasn't been a single visitor from the land of the Great Firewall.

When agents are ascribed selfish motives, economic theory points to grave inefficiencies resulting from externalities. In recent years, however, a wealth of laboratory evidence has questioned the descriptive validity of the selfish agent assumption.

We study a restaurant setting in which groups of diners are faced with different ways of paying the bill. The two main manipulations are splitting the bill between the diners and having each pay individually. We find that, in line with the classical model’s prediction, subjects consume more when the cost is split, resulting in a substantial loss of efficiency. Moreover, when asked to choose, diners prefer the individual pay to the inefficient split-bill method.

I remember reading somewhere that the laugh tracks that they use on most TV shows are sometimes 50 years old, and that [cue spooky music] you're laughing along with dead people. And I was just idly sitting here thinking, really? Is it true? Or is it an urban myth? I just can't believe that laughing then and laughing now are exactly the same.

This is Caterina, via a place I am not at liberty to reveal. The comments to the original post suggest the claim is actually largely true.

I am away from London, in a place closely resembling paradise (rural and peaceful, friendly people, constant supply of delicious, free food and alcoholic beverages). IT sucks, however, so I'm reduced to using my mobile phone's browser. The 'price' I have to pay for typing has shot up, so quantity has to fall. I'm back tomorrow afternoon - normal service will resume soon after.

Tim Worstall has excellent commentary on the Insane Sir Salman Rushdie post of the day (courtesy of the UK Daily Pundit). Here's the UKDP:

Maybe someone should set up a petition insisting that supporters of Rushdie pay for his 24 hour police protection. Although I suspect that's one bandwagon Pinko Finko and the chatterati won't be so quick to jump on.

The first duty of the State is to protect its citizens from violence from abroad. You know, keep Johnny Foreigner at bay. The second to protect them from violence at home.

That's why we have the damned institution, dipstick.

I would not have made the distinction between 'violence from abroad' and 'at home', and I would have probably used somewhat longer words. But any elaboration would have spoiled it. 'That's why we have the damned institution, dipstick' sums up my thoughts perfectly.

Postscript: For those who haven't been following the story, BBC News has the background (here and here)

I had an interesting discussion today on the economics of Scottish independence, and I recalled this piece by Evan Davis:

[...] It is interesting to ask what economic cases can be built for or against an independent Scotland. Indeed, lots of economists are taking to the newspapers and airwaves to offer a view.

Here's mine. It starts with the basic premise that Scotland has two things that England does not. The first is a disproportionate level of UK funded public spending. The second is oil, the revenues of which are taken by the UK government.

If Scotland were independent, it could expect to lose the UK funded public spending; but it could expect to gain the oil money. In the short term, that's the fiscal choice Scotland would be making if it decided to leave the UK and go it alone.

As it happens, the choice is a fairly balanced one at the moment. The oil money Westminster takes, more or less pays for the "extra" public spending Scotland enjoys.

Now, given the uncertainties of this debate, that's about all the data you need to make a short term assessment of Scotland's "viability" as an independent nation. If Scotland had been independent last year, and had stuck to the same spending policies, it would have had a government whose fiscal position was not that different to that of the UK.

A lot of debate has been stirred by this however. You can read about the competing claims in my postscript below. The Scottish Executive claims about Scotland's deficit make it sound unviable; the SNP claims make it sound as though Scotland is in surplus. The truth I think lies in between. On my calculation for last year, I think Scotland would have had a deficit of £3.5 billion, which would have been manageable.

However, does all this statistical banter matter? Probably not much. The short term is not the best horizon over which one should assess Scotland's viability.

The choice to take money out of the North Sea rather than out of the Westminister Parliament would have long term implications. And one negative implication in particular, is that an independent Scotland would be very dependent on oil.

Oil would be vital to sustaining the current level of Scottish public spending, accounting for a fifth of government revenue, and about the same proportion of national income. And yet, at some stage, the oil will run out or diminish. Or the price will fall. And then what?

The decision to go independent then, involves a gamble: that Scotland could re-develop itself better as a separate economy than as part of the UK; and that it could do so before the huge oil economy faded out of its current significance.

It's a gamble because we don't know what will happen to oil, and nor do we know how successful Scotland will be at reinvigorating its economy. It could go right, as it has for Ireland in recent years. Or it could go wrong, as it did for Ireland in the first few decades of its history.

However, there is one other implication of independence. And this is perhaps the most important, and the least predictable. Would it move the political centre of gravity in Scotland? For London-based journalists, it is striking just how far left of England, Scotland's politics lies. How would independence affect that?

There is something bothering me about this analysis, and Evan Davis's post is by no means an isolated example. It's not that Scottish independence is not, or should not be seen as, an economic issue: everything is an economic issue, including nationhood.

What strikes me as odd is the timeframe of the analysis. Is the government's fiscal position over the next five years really such an important element of national identity? Do you really want your grandkids to say their country went independent for a handful of pounds per capita?

Maybe my approach to discounting the future is too extreme, and I should be putting more weight on the present. But in a similar manner to the Stern Review on the environment, I believe the right timeframe for assessing nationhood should never be the nations' equivalent of next weekend.

If your wife's decision on whether to leave you or not hinges on how her car insurance premium will be affected over the next five years, you would not be unreasonable to think something's not quite right.

A few posts ago, I promised I would say more on the issue of unions and wage inequality.

Many economists suggest that the declining fortunes of unions are the main driver behind the increase in income inequality over the past few decades. While I agree that decreases in union membership and increases in wage inequality go hand-in-hand, I believe the standard narrative is somewhat misguided when it comes to causality. Rather than declining unions leading to increased wage inequality, it is the increasing variance of individual worker productivity that lies behind both.

In a pattern familiar to union watchers, the union will usually stand for wage equality rather than 'meritocratic' pay. It is easy to see why this is so: unions are democratic institutions. As is the case with elected governments, they will redistribute from the productive (potentially high-wage) to the unproductive (potentially low-wage) workers in order to please the median voting member. In the presence of a dominant union, all workers are awarded the wage that corresponds to the average productivity of all members.

In contrast to the state, however, membership of a union is not compulsory (at least in most cases). Why do high-productivity individuals choose to join the union then? To understand this, it is important to grasp a subtle point: even if a worker has higher productive potential than average and would thus be paid more in the absence of collective wage bargaining, what matters to the employer is marginal productivity - the product this additional worker will generate given the existence of all other workers.

Marginal productivity tends to fall as the number of workers increases. As a result, a large, unionised workforce will in many cases mean that the marginal productivity of the high-ability worker may actually be below average productivity. When that is the case, the high ability worker has an incentive to join the union, as the average wage represents the best attainable outcome.

When the differences in individual workers' productivity are relatively small, joining the union is the most attractive option for low and high ability individuals alike. However, as the nature of jobs changes and the productivity potential of some workers increases far above that of the others, opting for the average productivity wage offered by the union is no longer the most appealing proposition for some very productive workers - their marginal productivity is above average, and they can command a higher wage by choosing to go it alone.

As more and more workers break away from the pact in terms of individual productive potential, the average productivity of the union's membership falls; and the existence of a large pool of high-ability non-unionised workers restrict its ability both to redistribute from high to low ability workers as well as halt its own demise. At the equilibrium, the only sectors where unions are dominant are those where workers are of relatively uniform ability: for example, industries employing the low-skilled.

The fall in the power of unions was not a random event that then led to the increase in wage inequality we observe. This development should be attributed to the changing nature of production and the subsequent increase in potential wage inequality: unions were merely a short-run obstacle to achieving that new equilibrium.

[...] Poland has grabbed everyone's attention by calling for a change in voting rules, so that voting weights in the EU council of ministers are based on a square root of each nation's population. This is a system that Poland considers much more equitable than the one on offer in the constitution, which says that votes pass when 55% of EU members, representing 65% of the EU's population, can agree.

Economists and game theorists have been busy weighing in on both sides. [...] All the studies of combinatorics that currently fill my email inbox fail because, early on, they concede that in the interests of clarity they assume that coalitions consist of nations taking decisions randomly. But they don't. Luxembourg and Belgium always vote for more European integration. The Nordics vote with Britain and the Netherlands on free trade things. Ireland has low taxes so votes with Britain against tax harmonisation, but has a powerful farms lobby so votes with France to preserve farm subsidies.

The EU is not about mathematics, because EU voting is not about numbers, it is about politics. This may sound like special pleading, given that the author of this posting is a political reporter and not a mathematician. But any analysis that looks at this on the basis of numbers is entirely missing the point.

Well, that's not true. The quoted piece does a very good job of putting the proposed reform into perspective: De jure power in the Council of Ministers is a small contributor to, and poor proxy for, de facto power. This, however, is not the same as saying voting weight reform is irrelevant and that 'the EU is not about mathematics, it is about politics' or that 'any analysis on the basis of numbers is entirely missing the point'. As is the case with the evaluation of any reform, what matters is how the balance of power changes at the margin.

While the UK will not lose 30 per cent of its ability to block legislation as the Spectator claims, it is equally wrong to say that Britain won't be worse off if the Polish proposal is accepted. Given the absence of a suitable theoretical framework and good data on the determinants of de facto power in the Council of Ministers, it is difficult to establish the magnitude of this loss; but this doesn't mean the mathematical approach is redundant.

For those interested in the 'mathematics' of square root voting weights, Vox EU offers an excellent treatment - a must read for budding game theorists and political scientists.

Postscript: The Certain Ideas of Europe blogger also mentions the fact that many countries tend to always vote the same way on given issues. This is a call for the analyst to dig deeper and assess how reform would affect the de jure power of any given country taking into account its effect on the power of its allies. Again, this is not an argument against mathematical analysis; it is a simple re-statement of the perils of simplistic approaches.

Be very careful how you interpret this graph. In fact, it's better to try to forget it immediately and resist the urge to draw any inferences whatsoever.

The level of unemployment benefit affects three important variables: the government's fiscal position, incentives to work and hardship endured by the unemployed.

On the first of these, it is clear that the data reveal very little, at least in the absence of information on unemployment and a note on how they were derived. (Is 'averaged across a range of wages, family types and lengths of unemployment' self-explanatory to you? It's not to me)

With regards to incentives to work and hardship endured by the unemployed, the figures again reveal hardly anything. Greece is near the top of the table above, yet it enjoys strong family bonds - social norms dictate that the unemployed are handsomely supported. Also, how much of a loss in consumption does unemployment in each different country entails? If high quality health care, education and entertainment is provided by the state free of charge to both unemployed and employed, is the loss of employment income so important? For that matter, does the figure refer to pre- or after-tax pay?

No piece of information allows us to draw any inference without first assuming some factors or relationships remain constant. The challenge when faced with data of any type is to decide whether any such assumptions can reasonably be made: in the case of the figure above, the answer is no.

Of course, numerous other seemingly relevant facts and statistics are cited every day both in print and in conversation. My advice? Release a sigh of despair, mumble some French, and move on.

SEOUL (AP) — A South Korean bank is offering to help heartbroken soldiers dumped by girlfriends while away on mandatory military service by providing special interest rates for stilted troops.

Soldiers who can show letters or e-mail proving their break-up to a bank clerk can receive a new deposit plan with better rates and waived service fees.

A friend challenges me to explain this using standard economic tools, i.e. without retorting to 'the world has gone mad' class of explanations.

I'll try to rise to the challenge. Of course, there is always the possibility the bank is making a mistake and will suffer as a result. That said, I can think of at least four ways in which offering lower interest rates to heartbroken conscripts may actually be good for profits:

1. Dumped soldiers may indeed represent better credit risks bacause they are less likely to splash out on expensive gifts to their girlfriends.

2. The 'good-will' and publicity effects compensate for the suboptimal pricing of credit risk by drawing more customers to the bank.

3. To the extent that shareholders' utility arguments include both a private income and a social welfare element, 'socially responsible' undertakings can lead to increased demand in the bank's shares, and the company enjoying a lower cost of capital.

4. Assuming switching banks is costly, consumers optimise their choice of bank intertemporally. Choosing this particular bank may thus be a form of insurance against being dumped in the future.

Am I half-convincing?

Addendum: A reader alerts me that I am actually talking about lower interest rates for loans, while the bank is offering higher rates for deposits (this post was initially titled 'Breaking up is good for your mortgage').

Let me try and rescue this. Explanations #2 and #3 still stand. #1 has to be adapted to say heart-broken soldiers are more reliable savers (e.g. they are less likely to make large, sudden withdrawals or take out unathorised overdrafts. #4 is only relevant to the extent the bank establishes a reputation for offering premium rates to those suffering misfortunes.

Updated analysis aside, I'm still a bit embarassed about my initial attempt to explain the 5th of the last 3 recessions. There's a lesson here: Alcohol and econ-blogging should not mix.

France has more broadband DSL customers than most countries, including the United States. But if you happen to be one of the millions of customers having major problems with your connection, then life can be a living hell. High-tech service in France is like service in a Parisian cafe -- intermittent and snooty.

The problem is that there are at least 10 DSL companies battling for a share of the French market. The companies do a good job of selling services, often bundling phone and TV service with DSL. Unfortunately, the companies make promises to gain subscribers without having the infrastructure in place to make good on them.

Despite often appalling DSL service in France, there has been no severe public backlash.

In a country where government controls keep most critical services -- like medical care -- reliable and affordable, people are used to taking their complaints through the proper channels.

The author of this piece implies that competition is the problem and government intervention the solution. But what's really going on? What's the market failure here and what, if anything, can the government do to fix it? I'll be posting my answer soon - in the meantime, comments are open and I'm looking forward to reading your suggestions.

In my view, predominant amongst those is the Cyprus reunification referendum in 2004. Here's the historical background from Wikipedia:

The Cyprus dispute is the conflict between Greek Cypriots and Turkish Cypriots and also Republic of Cyprus and Turkey over Cyprus, an island nation in the eastern Mediterranean Sea. Since 1974 the internationally recognised Republic of Cyprus has been divided. The dividing line which cuts across the country has created a physical and social barrier between the Greek and Turkish Cypriot Communities. The Turkish Cypriot community declared itself Turkish Republic of Northern Cyprus, condemned by UN Security Council Resolutions as legally invalid. It is recognised only by Turkey.

In 2004, the Greek and Turkish communities held a dual referendum on the so-called 'Annan Plan' (BBC coverage here). The plan was put together over a long period of extensive consulation and opinion-gauging and set the terms for the reunification of Cyprus. In the end, the Turkish-Cypriot side voted overwhelmingly in favour, while the Greek-Cypriots rejected it. The plan was never implemented and Cyprus entered the EU a divided nation. The reaction was the same everywhere:

European Commission: The European Commission deeply regrets that the Greek Cypriot community did not approve the comprehensive settlement of the Cyprus problem, but it respects the democratic decision of the people.

US State Department Spokesman Richard Boucher: We are disappointed that a majority of Greek Cypriots voted against the settlement plan. Failure of the referendum in the Greek Cypriot community is a setback to the hopes of those on the island who voted for the settlement and to the international community.

European Commissioner for Enlargement Günter Verheugen: I feel cheated by the Greek Cypriot government... There is a shadow now over the accession of Cyprus. What we will seriously consider now is finding a way to end the economic isolation of the Turkish Cypriots.

So what's wrong with these accounts? Quite simply, it is nonsensical to claim one party in a dispute is responsible for the failure to reach a compromise - if the terms were sweeter for that party, a deal would have been struck, or it would have been the other side withdrawing its support. To my knowledge, no-one publicly commenting on the referendum ever grasped this simple and obvious point.

Of course, the Cyprus referendum is by no means the only example where one party is blamed for refusing to accept a deal. Phrases such as 'country X responsible for stalemate in talks' find their way into newspapers and public discourse all the time, despite the fact such analysis reveals little other than the author's moral stance on the issue.

When an arbiter puts a plan on the table that ends up being enthusiastically supported by one side and rejected by the other, the fault very probably lies with the plan itself; the first reaction should be to question the arbiter's competence or motives. This is especially true when said arbiter has very good information as to the voting intentions of the parties at each side of the dispute: in the case of Cyprus, it was abundantly clear early on that the final terms offered were acceptable to one community and not the other.

Without going into the details of the final plan, I believe that a deal acceptable to both parties could have been put to the vote instead. It's an absolute shame this didn't happen, and completely wrongheaded to blame the Greek-Cypriot side for this failure. The culprit was an incompetent UN, unable to realise that an arbiter should have no preconceived ideas, no preferences of their own and no interest in the opinions of parties that don't get to vote. The arbiter's role is confined to making sure the damn deal goes forward.

Using a list of countries generated by The World Factbook database, flags of countries fetched from Wikipedia (as of 26th May 2007) are analysed by a custom made python script to calculate the proportions of colours on each of them. That is then translated on to a piechart using another python script. The proportions of colours on all unique flags are used to finally generate a piechart of proportions of colours for all the flags combined. (note: Colours making up less than 1% may not appear)

Jeffrey Sachs—visionary economist, savior of Bolivia, Poland, and other struggling nations, adviser to the U.N. and movie stars—won't settle for less than the global eradication of extreme poverty. And he hasn't got a second to waste.

Here is more on Sachs's 'Millenium Villages'. Hagiographies of Sachs occur with impressive frequency. Mankiw is clearly, if not explicitly, ironic; Dani Rodrik is also sceptical. Academic economists are certainly less enamoured to Sachs than journalists - but whether this reflects envy about the man's image in the 'popular' press or deeper objections to the substance of his work is difficult to tell.

Personally, I am a fan - here's an economist who understands that the science of economics can not merely be 'disinterested study' and that packaging and marketing are essential elements of public policy.

At the same time, I am not too sure projects such as the Millenium Villages are worth the effort; and it does feel like press coverage is consistently way over the top. But how can you blame the press? Jeffrey Sachs is a journalist's dream.

And to prove the point, here's an excerpt from PBS's 'Commanding Heights' documentary, directly from the horse's mouth:

Drafting Poland's Reform Program

INTERVIEWER: Tell me the story about how you and your colleagues were given basically an overnight deadline to work out an economic plan for Poland.

JEFFREY SACHS: We had these discussions with all of the Solidarity leadership, and one night David Lipton and I went to the small apartment flat of Jacek Kuron, a marvelous man, one of the most wonderful people I've ever met, a real hero of mine. We were in his cramped apartment, he didn't really speak English but he understood most. Chain-smoking like crazy.

And we talked for a few hours, where I was trying to explain, at least [in] my view, how you get out of this mess that the Communist system had left behind. Of course no one had tried it yet, this was all hypothetical. And the idea was to sketch it, and every couple of minutes that I was speaking, he would pound on the table, "Pah, pah, pah, yes, yes, yes, I understand." And we'd gone on, pah, pah, and it was really exciting. We went on for a few hours like this. I was exhausted and the room was filled with smoke and he said, "Okay, clear."

Our friend was translating, he said, "Clear, write up the plan." And we got up, I said, "Well, this will be a great honor. Doctor Lipton and I are leaving tomorrow evening or the next day and we'll send you something just as soon as we can." "No. Tomorrow morning I need the plan." And I laughed and he said, "I'm absolutely serious, I need this written down now." And we looked at each other and our friend, who was the business manager of the Gazeta Wyborcza, which was the embryonic newspaper at the time, it had just been opened, and it was working out of a kindergarten school classroom with the offices on slabs of wood over sinks so you could put down a computer terminal. He said, "We'll go back to the office and we'll write something."

And Lipton and I went back and we wrote up a plan that night, from about 10:00 in the evening until I don't know if it was 3:00 or 4:00 in the morning.[We] delivered it the next morning to Kuron, to Geremek, to Michnik. And they looked at it, distributed to the Solidarity members of the Parliament, the so-called OKP, the Solidarity club of the Parliament, and we were told, "You can get on an airplane to go to Gdansk. It is time for you to go see Mr. Walesa."

Stamp duty could be switched from home buyers to sellers to help young people get on the housing ladder, Peter Hain, a candidate for Labour's deputy leadership, proposed yesterday.

He told the Simon Mayo programme on Radio Five Live yesterday: "We should consider whether it would be more appropriate for the seller of a property to pay the stamp duty rather than the buyer. This would exempt first-time buyers from the charge. A move like this would be revenue-neutral, but would be an enormous boost to young people."

I'll reserve comment. Greg Mankiw has more, on a post documenting similar thinking in Illinois.

A couple of weeks ago the NYT ran an interesting piece by Austan Goolsbee on Warren Buffet's plan for picking a successor. (gated NYT version, non-gated version at Economist's View). I tend to agree with Goolsbee's main point that Buffett's plan for picking a successor is a bad one (that is the plan as described in the article - there is some disagreement as to whether Goolsbee got his facts right to start with). What doesn't make sense is this:

A number of years ago, in a moment of professional weakness, I bought exactly one share of Warren Buffett’s Berkshire Hathaway....

For a brief moment, I thought his track record might disprove the economist’s mantra that no one can beat the market in the long term so it’s better to just invest in index funds like one that matches the S.& P. 500.

The mantra comes from the rather compelling evidence that actively managed mutual funds cost too much and don’t always act in the shareholders’ interests. They churn stocks, for example — raising fees while also generating capital gains taxes for the investors. Their high fees sharply cut into investment returns in the long run. ...

Berkshire Hathaway seemed like a mutual fund but without the bad incentives. Mr. Buffett doesn’t care about churning stocks to get bigger fees. He doesn’t do things at the expense of his shareholders. He is the Oracle of Omaha, for Pete’s sake. If anyone can beat the market, it’s him.

Well, I still own that share, but it hasn’t worked out as well as I had hoped. My share has underperformed the S.& P. 500... My colleagues have mocked me incessantly, but I have remained a closet romantic, hoping that Mr. Buffett would renew his secret formula and prove my colleagues wrong.

I have no choice but to be blunt: that's complete and utter nonsense. Furthermore, it seems that Goolsbee is not motivated by a desire to mislead the readers - he genuinely doesn't get it. The fact that his share did not outperform the market is no indication of whether or not Berkshire Hathaway's portfolio consistently does so.

For the sake of argument, let's say that Warren Buffett's portfolio consistently beats the market by 300% each year, and that he also has a certificate from God stating he will keep doing so in eternity. Should you expect to beat the market yourself by buying Berkshire Hathaway stock? The answer is a resounding no. The moment Buffett gets his holy certificate, the stock of Berkshire Hathaway will jump so that BH offers the exact same risk-weighed return to new investors as companies not similarly favoured by the Almighty.

Goolsbee's investment would have beat the market only if Warren Buffet had got unexpectedly better at generating investment returns sometime after the renowned University of Chicago economics professor and Obama's lead economic advisor purchased his BH share. If on the other hand Buffett unexpectedly went from generating (or being expected to generate) a 300% return on investment a year to 200%, BH's price would fall - and Goolsbee's own investment would not have proven to be such a good one.

To cut a long story short: You buy shares in a company if you believe other investors underestimate its potential. A company's profitability per se is neither here nor there.

Advertisement: An extensive post on the widely misunderstood efficient market hypothesis (as well as a couple of on-request posts and one on 'virtual' worlds) has been in the making for a while now, and should be appearing here soon.

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[...] insurance companies won’t be allowed to deny people coverage or charge them higher premiums based on their medical history. Again, points for toughness.

First of all, do you really get toughness points for this one? I know precious little about the state of the health care debate raging in America, but from personal experience most voters love this sort of stuff. Here's the government standing up to big multinationals and sacrificing corporate profits to protect the sick. I bet you good money that if you ask a representative sample of voters who stands to lose out, the majority will fail to name the segment of the population with relatively good medical histories.

Secondly, I'm not so sure the proposal is such a good one. As is the case with any market in private goods government tampers with, designating relevant information off-limits generates inefficiency. Some healthy individuals, unable to enjoy a low 'good medical history' premium, will no longer find it worthwhile to insure. As per 'The Market for Lemons', the bad health risks stay in the market - and the average insurance premium goes up.

While these issues are certainly important in themselves, my main objection lies elsewhere.

Health insurance is a marvellous thing and I recommend it to everyone. However, it is not the unhealthy we should be subsidising: it's the poor.

The richer you are, the more insurance becomes a financial product like any other. At the extreme, no matter how risk averse Bill Gates is, it is not unlikely that health insurance has no place in his optimal investment portfolio. On the other hand, a poor person sharing Gates's risk profile would find it beneficial to invest a much larger proportion of her savings on health insurance. The reason is simple: potential health care costs represent a much greater risk to her 'heavy-on-health, light-on-other-assets' portfolio than they do to Gates's. Any government intervention on the health insurance market ought to have the poor as its main focus, not the unhealthy per se.

Beyond privacy, the only good argument I can think of for concealing medical information is the perverse incentive it generates for people to avoid medical examination that may reveal a high probability of future health problems. But there are better ways for public policy to tackle this.

Make insurance compulsory, allow medical histories to be seen by insurers to increase efficiency in the market, and have the government directly subsidise the poor that have adverse medical histories, for example by offering them insurance by the state on a public welfare rather than profit maximising basis.

To cut a long story short, it is important to realise that the poor and currently healthy need insurance as much as anyone - and it would be a mistake to make it more difficult for them to acquire it.

Most employees in permanent, full time jobs are offered a very specific deal on the number of days they can take off, and deviations are allowed only in extreme circumstances. Recently, mainly driven by a desire to accomodate working mothers, there has been some change: for example, part-time contracts (the four-days-a-week sort) have become more common than in the past.

But the basic pattern remains the same. Even at times workload is low (and thus the productivity of the marginal worker is low or zero), an employee who so wishes is not allowed to 'purchase' (for example by foregoing the corresponding part of his salary of multiple thereof) extra days off from his employer.

This is a puzzle to me, because I know for a fact that such an option is valuable to both employees and employers. Personally, I would forego up to £5,000 ($10,000) for the ability to purchase extra days from my employer at times my presence is not required. If I was an employer, I would also be happy to save on labour costs during times there is some excess capacity, or alternatively be able to hire the best talent at lower hourly rates simply by agreeing to fewer total days of work.

To put this in an economic framework: In many circumstances, it must be the case that the there is a sum of money X an employee can pay an employer for extra days off, with X being less than the worker's expected productivity during those days and less utility enhancing to the worker than those extra days. Yet I've never heard of such a transaction taking place, even implicitly. (That's not entirely true. During my National Service, extra days off were given to soldiers that were particularly productive. That was a special case, however, as monetary compensation was simply out of the question: a conscript's monthly salary was fixed at 8 euros.)

Salary and annual leave are both elements of the compensation workers receive. Why is the former so flexible and the latter so rigid?

A potential reason could be the existence of a sclerotic legal framework, but even this is not a particularly convincing explanation: tales of government incompetence aside, if the demand for reform was there it would have happened.

The only half-satisfying explanation I can come up with is path dependence. Back in the days of industry and the conveyor belt, a worker's productivity was essentially determined by attendance. 300 days in front of the conveyor belt meant two times more 'product' than 150 days. At the same time, pay was determined by employer-union negotiations: there were no 'high-performance' employees standing to gain by breaking ranks and going it alone.* Collective wage bargaining is, well, collective; and as a result everyone in the union simply accepted the wage and leave settlement that maximised the median member's utility.

Today, while there is no shortage of super market tills and call centres, more jobs have become 'flexible' and potential improvements in pareto efficiency have become possible. However, the institutions (management norms, employment law) surrounding performance pay and non-pecuniary benefits such as annual leave take time to adjust.

Commenting on the rise of performance related pay, Tyler Cowen writes: 'For me the puzzle is why the world held back so much on bonus pay for so long.'

I am wondering the same about annual leave. Is it long before I can purchase some much needed extra days off from my employer?

*More on the 'productivity spread' and the rise and fall of unions soon.

The previous post got me thinking: Can daughters also explain the party of the President of the United States?

To find out, I got data on all US Presidents since 1945 from Wikipedia and fit them on a linear probability model. My dependent variable was the party of the President and the difference between daughters and sons the regressor.

The results? Having an extra daughter increases the probability of a President being a Democrat by 1.7%.

Now, my initial dataset is not free of problems. Reagan had the highest number of daughters of any Presidents (four), and thus messes up with the results significantly. But Reagan, of course, was a Democrat during his early years in politics. Correcting for this fact, 1.7% jumps to a more respectable 9%.

Good going so far, but of course there's more to it: my model does not account for intergenerational effects. Assuming that parents also have an effect on their children's voting behaviour, George W. Bush should clearly be excluded - his dad had no less than 4 sons. This leads us closer to the true value of the probability in the population - a by now very convincing 13%.

But this is not enough to establish causality - we also have to make sure our results are robust. To test for this, I add an additional observation to the dataset excluding W Bush and with Reagan labeled a Democrat. Enter President Jed Bartlet, Abu el Banat, father of 3 daughters, the fictional President of 'The West Wing' - the award-winning TV series. If our model's specification is correct, including President Bartlett should not affect our results, since he is not for real. Indeed, his inclusion returns us an estimate statistically equal to 13% - a clear sign that our model does a good job capturing the true effect of (real) daughters.

While more research is necessary to broaden the evidence base and explore other interesting hypotheses, the results here are very promising. So now you know: next time you come across a rising political star with daughters, chances are he's a Democrat.

Disclaimer: This post is meant as a joke, please do not take any of this seriously. I'm enjoying a lazy weekend.

Oswald and Powdthavee present very convincing evidence that they can turn you into a left-winger - and that's before they even grow old enough to utter a word. Using data from a rich longitudinal dataset, the British Household Panel Survey, they find that every extra daughter raises a parent's probability of voting Left by 2 percentage points.

The authors also have a go at explaining why:

[...] Because of wage discrimination and different female preferences over public goods (females derive greater utility from public goods like community safety), rational parents tilt to the left if they have daughters. A male voter who has a daughter becomes subconsciously sympathetic to the ‘female’ preference for the policies advocated by left-wing parties. This conceptual framework gives correct predictions; whether it is in fact the right explanation for the patterns in the data seems an important topic for continued research.

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This blog reflects my personal views and is in no way representative of those of my employer or my mum. To make sure no misunderstanding arises and their lives stay stress-free, I will remain anonymous.